Whats the relation between interest rates and the amount of loanable funds?
Question: I seemed to have been blessed with a brain that doesn’t really understand the relationship between interest rates and loanable funds when there is both an increase in interest rates and a decrease in interest rates. Could you please explain this complex idea or I shall never be able to sleep again. Answer: Probably what confuses you are things that you really don’t need to worry about to understand the basic ideas. In the real world, there are lots of complications. The amount that banks can loan out is affected not only by the amount of deposits they have, but by the type of deposits they have and the “reserve requirement” imposed by the Federal Reserve. And, of course, there are many different ways to loan out money. Interest rates are a price, just like the price you pay for food, textbooks, or CDs. Interest is the price you pay for getting money now that you won’t pay back until sometime in the future. Interest has two main parts. First, the lender charges you for getting
